The economics of fear comes from the very top

Skype is now on the list of no-go tech spaces that includes Facebook, Google, Line, Twitter and WhatsApp. Photo: Bloomberg

Spending a few days in Hangzhou, which many call China’s Silicon Valley, is a disorienting experience for we Americans these days.

At a time when US President Donald Trump is stepping away from the global economy and making coal great again, a region producing the second largest number of billionaires is stepping up. Jack Ma’s Alibaba might have started the Hangzhou boom, but legions of young entrepreneurs are taking things to entirely new levels, particularly in the fintech and renewable energy spaces. But there was something rotten in the capital city of Zhejiang province while I was there recently, and it involved Skype.

There was a lot of angry chatter about the popular Microsoft phone service disappearing from mainland app stores. An ominous statement from Apple Inc. said: “We have been notified by the ministry of public security that a number of voice-over-internet protocol apps do not comply with local law.”

This gets at one of the great paradoxes of today’s China: If Xi Jinping is the strongest leader since Mao Zedong, why is he so afraid of letting entrepreneurs use technologies at the centre of global innovation?

Skype is now on the list of no-go tech spaces that includes Facebook, Google, Line, Twitter and WhatsApp. These services aren’t the enemy. Instead, it’s antiquated and paranoid thinking that excludes Chinese innovators from the global conversations of the day.

Xi isn’t alone, though. In different ways, Trump and Japanese Prime Minister Shinzo Abe also are letting fear imperil their respective economic trajectories.

A self-described tough guy who tells it like it is, Trump is cowering under the bed to avoid a global financial landscape he doesn’t understand. That’s hardly the spin coming from Trumplandia. It claims America has never been more respected and that everyone is clamouring to invest there.

Yet, rather than compete in an increasingly dynamic and steadily levelling playing field, Trump is taking America’s toys home. Pulling out of the Trans-Pacific Partnership wasn’t some aberrational tantrum, but the beginning of a pattern. Trump’s preference for bilateral trade deals over multilateral pacts smacks of insecurity. It’s easier to bully one smaller competitor than interact with several at once who might push back. Trump loves Twitter because he can lash out at foes, and close the app before they respond—or block them.

Abe, too, colours himself the strongest leader his nation has seen in decades. By some measures, he has a point. With majorities in both houses of Parliament, decent approval numbers and reasonable odds of becoming Japan’s longest-serving leader, Abe has everything his last several predecessors lacked. Everything except political courage.

With Abe’s clout, he should be revolutionizing the economy, running roughshod over vested interests and throwing Japan’s weight around the globe. Instead, he’s outsourcing foreign policy to Trump’s White House, whatever that might be (even Trump’s state department doesn’t know). Abe has avoided upsetting the Tokyo apple cart. While Trump handles Japan’s diplomacy, Bank of Japan governor Haruhiko Kuroda is handling the economy.

What does it mean when the “strongman” leaders of the three biggest economies shy away from epochal change?

As Xi ensnares Hangzhou’s innovators in his web of censorship, he’s demurring on disrupting Beijing. Sure, he’s purged rivals to consolidate power. That may include former internet tsar Lu Wei, the face of Chinese cyberspace who routinely scored meetings with Jeff Bezos of Amazon, Tim Cook of Apple and Mark Zuckerberg of Facebook. News of his detention is the talk of Hangzhou.

But Xi has avoided the two touchiest Chinese reforms: taking state-owned enterprises (SOEs) down a peg and scrapping annual growth targets. While related, both changes would do to the Communist Party what Alibaba—and Amazon before it—did to the bricks-and-mortar retail space. Reining in SOEs would give China’s Silicon Valley set—and the private sector in general—greater scope to upend China Inc. A dangerous pursuit, considering how many party members are making millions of dollars, or billions, from the status quo.

The second is equally dicey, given that the party’s legitimacy rests on rapid gross domestic product growth. Any serious move to recalibrate growth engines from exports and runaway investment to services will necessitate slower output growth. That will only happen if Xi displays greater political courage.

Might Xi, Abe and Trump find their reformist mojo? Hope springs eternal, as evidenced by the bullish chatter about the Group of Three’s economic prospects. Xi’s China, it’s said, can grow 6.5% in perpetuity. Abenomics is thought by many to be gaining some traction. Trump’s odds of passing a big tax cut, optimists claim, look great, as do the potential effects on US growth.

But there are valid reasons to doubt these best-case scenarios. All it takes is a few days in Hangzhou to see how even the strongest of leaders aren’t as gutsy as they appear. Just don’t plan to have this debate over Skype.

William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.